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The Shifting Sands Of African Trade

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In a trend consistent with Africa’s evolving economic realities, the continent’s trading patterns and partners are shifting significantly toward emerging economies, led by Asia.

Products that the Americas, formerly Africa’s biggest trading partners, have scaled down on, Asian nations, particularly China and India, have been stepping in to buy to keep their industrial machines humming.

China-Africa trade, which stood at about $10 billion at the turn of the century, ballooned to about $222 billion last year. India-Africa trade leapt from $5 billion to over $70 billion during the same period, according to Simon Freemantle, senior analyst at Standard Bank’s Africa political economy unit.

Concomitantly, Africa’s trade with the Americas has fallen significantly. In 2008, for instance, the US was Africa’s largest trading partner, with commerce between the two of about $145 billion, according to figures provided by Standard Bank (Stanbic) in an April 14, 2015, note, Insight and Strategy. By 2014, that value had plunged by half, to just $73 billion, the bank said.

Stanbic put it this way: “Africa now presents more-compelling opportunities for the US in terms of market opportunities for US firms … than it does as a source of natural resources the US requires to fuel its own industrial ascent.”

The decline in US trade is owing chiefly to America’s drive for energy self-sufficiency. The primary forces driving the boom in trade with India and China are the rapid growth, industrialization and urbanization of these two economies. These have led to a dramatic increase in demand for commodities, of which Africa is a chief exporter. The ongoing and impressive economic growth being experienced by many of Africa’s key economies is also fueling trade by creating internal demand for goods manufactured in China and India.

In fact, China’s exports to Africa have risen almost as swiftly as its imports from the continent. Last year, China exported $105 billion worth of goods to Africa, up from $6 billion in 2001, says Freemantle. The stronger political ties India and China have forged with key African economies are providing Chinese and Indian companies with better access to African markets.

STRUCTURAL REFORMS

Jan Dehn, head of research at Ashmore Investment Management in London, says African countries have become better places to do business, as well as more reliable trading partners. He also described a regime of improved governance within Africa following adjustments in the 1990s, a period when several nations embarked on structural reforms that transformed their economic and business environments.

Africa’s trade with Asia has been accompanied by enormous volumes of Asian investment in Africa, says Dehn—a trend that, in turn, has created jobs and economic growth, especially in the form of infrastructure development.

In Nigeria, Angola and other countries, Chinese and Indian companies are actively involved in infrastructure development. That contributes to a virtuous cycle, as these activities aid economic growth, which translates into increased consumption, says Dehn.

But it’s far from smooth sailing. Africa almost exclusively exports commodities, from oil to foodstuffs, cocoa and tobacco.

Oil exports in Africa’s biggest petroleum exporting nations—Angola and Nigeria—account for up to 90% of total export revenue, and the two nations have seen their exports to the United States dip significantly. Nigeria’s oil exports dropped from an annual value of $40 billion in 2008 to $2.7 billion last year, representing a plunge of more than 90%, according to Standard Bank.

Angola’s oil sales to the US fell from $19 billion to $5.2 billion over the same period.

The scenario looks the same across Africa, and the downside risk is obvious: When world prices tumble for certain commodities, or a big customer turns to another source, national earnings tank and economies contract.

Cairo-based African Export-Import Bank, or Afreximbank, notes in its latest annual report that Africa’s merchandise exports declined in 2013 and 2014 because of “falling global demand for major commodities, including oil, gold, cocoa, cotton; weak commodity prices; flat import demand in developed economies; and moderate import growth in developing economies.”

Africa’s merchandise exports fell 10.2% in 2013 and another 7% to $555.6 billion last year, reflecting the deep impact of tanking commodity prices on the exports of Africa’s five largest trading economies: South Africa, Nigeria, Algeria, Angola and Egypt, Afreximbank’s report notes.

There are a few exceptions, South Africa being by far the most notable, says Freemantle. In 2014, South Africa’s fourth-, fifth- and sixth-largest export categories were vehicles, iron and steel, and machine products—together accounting for about one-quarter of the country’s exports for the year, he points out.

The challenge is to ensure that proceeds from trade in resources accrue to the population as a whole instead of the few, because otherwise there will be social problems in the longer term.

~ Naguib Attia, IBM

The dominance of raw materials and services in Africa’s trade is a reflection of the low level of industrialization and manufacturing in the continent, Dehn notes. But this should be seen as a reflection of the continent’s reality: Its comparative advantage is not in manufacturing, at least not large-scale manufacturing, he says. Its strength lies in abundant resources.

SELF-IMPOSED BARRIERS

The thorny issue that has plagued some African nations for generations is how to help trading wealth trickle down to the general population.

“The challenge is to ensure that proceeds from trade in resources accrue to the population as a whole instead of the few, because otherwise there will be social problems in the longer term,” says Attia.

“I do not see these challenges being addressed in the next five years,” he adds, attributing the delay in part to the fact that African nations still maintain “meaningful” trade barriers with each other—despite regional economic groupings that are taking shape across the continent.

“The quality of public investment, especially in infrastructure,” agrees Dehn, “is extremely poor. It takes far too long and costs far too much to transport goods from the coast to inland [areas] in most African countries.” Ports and borders are inefficient and corrupt, he notes, and roads are poorly maintained.

“Many of Africa’s barriers to trade are self-imposed,” he observes.

Because African countries produce similar commodities, intra-African trade levels are relatively low. Only about 10% of Africa’s total exports find a market within the continent, Freemantle notes.

He blames a low levels of industrial activity, the result of which is that “African economies generally do not demand the commodities their neighbors export, nor are they capable of producing the kinds of goods their neighbors demand.” He says a lack of transportation infrastructure between countries elevates the cost of trade, as does burdensome bureaucracy and corruption at border posts.

Freemantle sees ongoing efforts, driven by Africa’s Regional Economic Communities (RECs), to harmonize trade treaties and allow freer movement of capital, goods and services across borders as likely too boost intra-African trade. “It will certainly aid in the fluidity of some of the more obvious flows between partner countries, particularly in agricultural goods,” he says.

Prominent among these cooperation pacts is the formation of a “super REC,” the Tripartite Free Trade Area, which will encompass three existing communities: EAC, COMESA and SADC. When it takes off as planned in 2016, it will include 26 nations, or half the countries on the African continent, with a combined population of some 600 million people and annual GDP of about $1 trillion.

The three RECs are expected to sign an agreement for a customs union by the end of next year, pushing the continent closer to its dream of economic unity. It will build on what has been achieved by the member groups, especially EAC—the East African Community—which comprises Burundi, Kenya, Rwanda, Tanzania and Uganda.